NEW YORK--()--Fitch Ratings assigns an 'AA+' rating to the following Erie County Fiscal Stability Authority, New York's (ECFSA or the authority) bonds:
--$25,355,000 sales tax and state aid secured bonds, series 2013A;
--$32,350,000 sales tax and state aid secured bonds, series 2013B.
The bonds are scheduled for negotiated sale the week of March 18, 2013.
Proceeds will be used to provide funds for the capital needs of Erie County and to refund a portion of the county's outstanding bonds.
In addition, Fitch affirms approximately $353 million of ECFSA sales tax and state aid secured bonds at 'AA+'.
The Rating Outlook is Stable.
The bonds are secured by a pledge of ECFSA's right title and interest in revenues of the authority which consist of the county's local sales tax revenues, state aid revenues paid to the authority, and other aid, rents, fees and charges of the authority.
KEY RATING DRIVERS:
STRONG LEGAL PLEDGE: The authority is a bankruptcy-remote, statutorily defined issuer. A tight legal framework with a first perfected security interest in the pledged revenues protects bondholders.
STRONG COVERAGE LEVELS: Coverage levels are high, and the bonds maintain statutorily defined non-impairment mechanisms and maximum outstanding debt limits.
SENSITIVE REVENUE STREAM: The pledged sales tax revenue is economically sensitive and derived from a below-average economic base.
The rating is sensitive to shifts in debt service coverage levels. Given the broad coverage and somewhat limited economic base, a change in coverage sufficient to affect the rating is unlikely.
Erie County (GOs rated 'A' with a Stable Outlook by Fitch) is located in Western New York bounded by Lake Erie on the west and Canada to the north. The county includes Buffalo (GOs rated 'A+' with a Stable Outlook by Fitch), the state's second largest city by population.
ROBUST SECURITY STRUCTURE
ECFSA was created under the Erie County Fiscal Stability Authority Act (the Act) as a public benefit corporation by the state of New York in 2005 to provide a debt funding vehicle and financial control and oversight of the county. The Act allows ECFSA to issue debt for county purposes of up to $700 million in bonds (of which 60% will have been issued including the series 2013 bonds) and $250 million in cash flow notes with all debt maturing by 2039. The additional bonds test (ABT) for senior debt is strong, requiring 3.0 times (x) coverage of maximum annual debt service (MADS) from sales tax revenues alone. Fitch does not believe the ABT provides much additional protection given the limitation on issuance.
ECFSA is a bankruptcy-remote issuer. The bond structure grants a first perfected security interest in Erie County's 4.75% local sales tax less the 65% of the first 3% currently required to be paid to cities and school districts. The state collects sales tax revenues and distributes them to the state comptroller, who then pays the revenues directly to the bond trustee. The county receives residual revenues only after the payment of ECFSA's debt service and operating requirements. The bonds are also secured by non-reimbursement-based state aid revenues, if applicable, but there have been no such state aid payments for several years.
STRONG COVERAGE LEVELS EXPECTED TO CONTINUE
Pledged sales tax revenue has grown steadily, providing healthy debt service coverage and strong bondholder protection. Sales tax revenues were up 4.5% in 2011 and 2.4% in 2012. Coverage of debt service by 2012 revenue was 8.4x. Coverage on pro forma MADS ($59 million in 2016) provides 6.9x coverage based on 2012 revenues.
Potential threats to current strong debt service coverage include declines in county sales tax revenue and alterations of the tax structure by the state or county. Fitch believes the former is mitigated by the strength and diversity of the county's tax base, and while pledged revenues are economically sensitive, the magnitude of the deterioration that would need to occur to have a significant impact on debt service coverage is unlikely.
While the county and state both have the unilateral ability to alter the tax structure, Fitch believes that the risk is mitigated by state and county non-impairment clauses; specifically, the county covenants to maintain a local sales tax rate of at least 3% through 2039. In addition, any change in local tax law cannot result in coverage below 2.0x MADS on all outstanding authority bonds. Of the 4.75% sales tax rate, 1.75% is subject to biennial renewal, with the next renewal expected on Nov. 30, 2013. These taxes have historically had strong support so Fitch believes that renewal is highly likely. On a pro forma basis, 2012 collections of only the 3% local sales tax provide 2.6x coverage of MADS. The authority receives a lower percent of the first 3% of the local sales tax than of the additional 1.75% due to larger allocations of the revenues to municipalities and school districts.
The current bond issue proceeds will be used to provide funds for the capital needs of Erie County and to refund a portion of the county's outstanding bonds. Future borrowing by the authority will be used to finance the county's cash flow needs and pay for improvements to the Buffalo Bills football stadium. The authority is currently using approximately 60% of its bond authorization. Amortization is rapid with 91% of debt paid off in 10 years.
BELOW AVERAGE SOCIOECONOMIC INDICATORS
Taxable value within the county has grown steadily, avoiding the recent fluctuations seen in other parts of the country. However, the county has experienced population declines over the past several decades, including a 3.3% decline over the past decade to a current level of 919,000. Employment opportunities in the service sector have increased and strong health care and higher education, including Kaleida Health, Catholic Health Systems and State University at Buffalo, have had a stabilizing effect on the county's economy. The university is the largest and most comprehensive component of the State University system with more than 28,000 students and approximately 10,000 employees.
The county's unemployment rate, measured at 8.4% in December 2012, is above the state and national rates of 8.2% and 7.6%, respectively. Consistent with the upstate New York region, income levels in the county remain below average as evidenced by 2011 median household income of $48,805 which equals 86% and 93% of state and national levels, respectively.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, Underwriter and Bond Counsel.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria